Friday, July 17, 2009

There are more options for retirement savings than there are people looking to save. OK, that’s not true, but it can feel that way. Most people in their 20s and 30s get overwhelmed and don’t bother to choose any, which is the real problem. The fact is, the savings vehicle we choose doesn’t matter as much as choosing one. The important thing is to get started!

My employer makes 401k contributions for me, but it’s a small amount. I can deduct pre-tax money from my paycheck to contribute to the plan, but the company doesn’t match what I put in, so there’s no incentive. Instead, I went ahead and set up a Roth IRA. Here’s why:

1. I maintain full control over my investments by using my own independent plan. If I lose or change jobs, I don’t have to worry about rollovers or vesting. Since I manage everything myself, I have an online account management page that I’m used to, and don’t have to deal with any changes.

2. Any money I put in has already been taxed. That means that every dollar in the account is mine. I will not pay any sort of income tax when I start making withdrawals, so I’ll know exactly how much to expect for retirement. Any future increases in tax rates won't affect me (and they're likely to go up a lot).

3. After I’ve had the account for 5 years, I can withdraw any money I’ve put into it whenever I want, with no penalties. If I decide to sacrifice my retirement fund to buy a house, go on vacation, or enter a poker tournament, I can choose to do so. Other retirement vehicles (those that let you put in pre-tax dollars) all have restrictions and penalties on when you can withdraw your own money.

As you can see, I’m a control freak. But I think everyone should be when it comes to their money. And I like the Roth IRA because it gives you that control. There are drawbacks, of course. Putting in taxed dollars means that you’re depositing less money, so there’s less in there to grow. 401Ks and other pre-tax vehicles also allow you to decrease your yearly salary, so you get taxed less. Also, part of me maintains a paranoid fear that the government regulations will change someday and they’ll start taxing Roth IRA withdrawals.

But overall I think the solid pros outweigh the vague cons, and I plan to continue investing through the Roth IRA indefinitely.